There’s nothing like a little blood on Wall Street to make you question whether you need to change things up on the investment front, whether that means rethinking strategies and goals or switching financial advisors. After all, in the latter case, you are paying for a degree of protection from loss—at least in theory. The Standard and Poor’s 500 stock index plunge of 11 percent earlier in the year surely made some investors wonder if all was being done to help them weather the storm. Record hedge fund losses and closures announced at the end of last year didn’t inspire much confidence either.
Nonetheless, investors shouldn’t be too quick to switch gears. “Market volatility shouldn’t be a catalyst for change unless you were already unhappy with your advisor,” maintains Elissa Buie of the Yeske Buie wealth management firm in Vienna, Va. However, if you’re not working with anyone and you’re unhappy with your portfolio results, this could be a good opportunity to build your team.
Evaluating an investment advisor can be tricky. The keys: chemistry, credentials, track record and an investment philosophy you’re comfortable with. Comfort and trust were the two things Carolyn Cedar, a Brooklyn-based associate real estate broker, and her husband Mark wanted most when they changed advisors a couple of years back. “Our former advisor was perfectly lovely but I felt like her model was more about selling us things, like life insurance. I didn’t feel like I got a lot of follow up. I lacked trust.” The Cedars now meet regularly with their new advisor, who has put a full financial plan in place. “He reaches out frequently and he knows important things about us, like the fact we’re renovating our kitchen,” explains Ms. Cedar.
When looking for an advisor, here are some things to keep in mind.
Credentials
In real estate, the axiom is location, location, location. In the investment world, it’s credentials, credentials, credentials. Before decoding the acronyms, understand that there are two main categories of advisors, depending upon the regulations that each group must comply with by law, says W. Michael Prendergast, CFP and director of Altfest Personal Wealth Management in Manhattan. There are advisors who agree they are legally required to always act in your best interest—or in industry parlance, held to a fiduciary standard. The other group follows what’s called a suitability standard. That means the recommendations they make for you need to be generally suitable for you—but nothing more.
‘Market volatility shouldn’t be a catalyst for change unless you were already unhappy with your advisor.’ —Elissa Buie of the Yeske Buie wealth management firm
Usually fee-only certified financial planners (CFP) and Chartered Financial Consultants (ChFP) work under the fiduciary standard. For these designations, advisors must take personal finance planning courses and, in the case of the CFP, pass a board exam.
Traditional stock brokers, registered representatives and insurance brokers often fall under the suitability standard, enabling them to recommend products for which they will be paid a commission or fee—say, large-cap stocks to diversify a portfolio heavy on small- and mid-caps. In this case, the advisor is under no fiduciary responsibility to keep costs low. The suitability standard does, however, restrict an advisor from putting a client in an inappropriately aggressive or risky investment. (Earlier today, the government announced new rules that would require all advisors to act in the client’s best interest when it comes to retirement savings advice.)
Letters not often seen after an advisor’s name are CPA (certified professional accountant), meaning you’ll need to retain your tax professional—though your advisor should certainly be well versed enough in tax issues to make sure you are using tax-advantaged savings and withdrawal strategies. (Ditto estate attorneys and estate planning questions.)
Compensation
Fee-only advisors, as the name suggests, collect only a fee, usually a percentage of your investment portfolio. They do not receive commissions. By the same token, commission-only advisors get paid not by you but by commissions they make selling investment products to you. The difference between these two is pretty self-evident as the Cedars learned firsthand.
The waters get choppier with a fee-based advisor, who may be a CFP working for a big firm that sells investment products. You may pay him or her a percentage of assets under management but he or she may still make a commission if you buy products sold by the firm—a gray area increasingly under scrutiny by both consumer advocates and regulators.
Approach
You’ve made good money and even had a bit of success in investing on your own. You may have definite opinions about how you want your portfolio invested and those opinions may conflict with your advisor or potential advisor.
“If you’re not an economist, you don’t have the right to have strong opinions,” maintains Ms. Buie. “Investing is not opinion, it’s science.”
Harsh words and perhaps not what an in-the-know client wants to hear. To be fair, Ms. Buie adds, “That’s not to say that you don’t want an advisor whose science of investing you don’t agree with.”
Still, most advisors are subtler when conflicts arise. “We may have a client who built all his wealth in the oil business,” says Mr. Prendergast. “That’s been successful for him and he feels he has the added knowledge to enable him to successfully invest more in this industry.” Mr. Prendergast says it’s the advisor’s job to communicate the level of risk associated with concentrating too much in one area, especially a volatile sector such as energy. “We’d recommend a certain percentage and if the client wants to invest more than that we may ask him to sign something saying we warned him of the risks. This is the polite way we disagree.”
In other cases, when advisor and client are too far apart, it may be time to part ways. Most advisors have a strong investing philosophy they adhere too—long-term value, aggressive growth, capital preservation, etc. “If a client feels the relationship is a bad fit, there are other advisors out there who may have a more compatible philosophy,” says Mr. Prendergast.
Approach can apply to more than investment style. Abigail Carr, a marketing executive who, with her husband and three children, recently relocated from Manhattan to the Boston area, credits her new financial advisor with helping to make the move possible—something she’s not so sure her former advisor would have done.
Many people use the same investment advisor as their parents. While it’s good to know you’ve got someone who is already vetted and trusted and who knows your circumstances, the generation gap can make things difficult.
“We had an advisor who was working only with our investments and it felt like they didn’t know anything about our lives or what we wanted to do. When we met with our new advisor we talked right away about the fact that we wanted to move out of New York and what that would entail—whether we could afford for one of us to be out of work for a time, how much we could spend on a house in the new location—lots more personal questions. The conversations had to do with how we dreamed our life might be, as well as technical questions, like how best to fund college for our three kids, and how much mortgage we could handle. In other words, she gets us.”
Allocation
We all know the right mix of equities, fixed income, real estate and other investments can help us catch the upswings in certain market sectors and shield us from the downturns in troubled spots; advisors ensure your assets are spread far and wide to maintain that safety net.
Too often, says Peter Rup, CEO of Artemis, a New York City-based wealth management firm that works with a handful of wealthy families, advisors have outdated or unsophisticated ideas of asset allocation. “They’re not willing to rotate your portfolio as much as necessary; sometimes inertia sets in,” he says. One example: Corporate fixed-income was a much better opportunity in 2010 than it is in 2016. Some managers, he says, will hide behind their original allocation and say something like you agreed to be 25 percent in corporate fixed-income. “What they won’t say is that was years ago and back then corporate bonds were up 14 percent and this year they’re up 1 percent,” says Mr. Rup.
Mr. Rup suggests asking your advisor or potential advisor about the concept of dynamic asset allocation—a system that makes allocation changes based on changing economic conditions and changes in your life.
Family ties
Many people use the same investment advisor as their parents. While it’s good to know you’ve got someone who is already vetted and trusted and who knows your circumstances, the generation gap can make things difficult. “I’ve spoken to too many people who had gone to their parents’ advisor and left feeling either that the visit was a complete favor to their parents, or that they received boilerplate advice for ‘someone their age’ without regard to their own objectives and values,” says Tyler Landes, CFP at Tandem Financial Guidance, a Kansas City, Mo.-based firm that specializes in working with young professionals and families.
And younger investors are less likely to trust advisors, according to the 2015 J.D. Powers Investor Satisfaction survey. About two-thirds of people born before 1946 say advisors make recommendations in their best interest, while only 40 percent of people born between 1977 and 2004 say the same. In general, people like to work with someone around their own age, says Ms. Buie. If that’s the case for you, feel free to shop for an advisor who understands where you are in life and uses the interactive tools and resources you’re familiar with.
In her search for an advisor, Abigail Carr did consider her parents’ advisor—for a minute or two. “He seemed very nice but also kind of ‘small town.’ It seemed we wouldn’t get the breadth of investment options we would be looking for from the trust officer of our parents’ local bank.”
Sometimes, says Ms. Buie, the best compromise is signing up with a younger advisor who works at a firm with plenty of experienced employees. That way you’ll have the gray hairs on hand if you need them, but you’ll work with someone who feels like more of a peer.
Other times, when family assets are being managed as a whole, breaking away isn’t so simple. The key, says Mr. Prendergast, is to work with the current advisor and your family to shift from a pooled approach to managing as many assets as possible in individual portfolios according to each family member’s goals, time horizon, risk tolerance, etc. Once there are separate portfolios, if a family member is still dissatisfied, he or she can more easily move.
